Investing is not a competition

Posted by TEBI on August 11, 2020

Investing is not a competition




The story of Tesla’s share price is extraordinary. The company’s stock price has gone up more than 500% in the past 12 months.

Shares in Elon Musk’s company were trading at around $230 at the end of July last year. They are now more than five times higher, in the region of $1 450.

By market size, Tesla is now the biggest car maker in the world. Its total value is $270 billion. It has flown past Toyota, which is worth around $215 billion.


Missing out

There’s no question that to anyone who owns the stock, this will feel like a ‘”win”. Over the same period, the S&P 500 is up 17%. Owning Tesla has clearly been massively profitable.

Similarly, if you don’t own Tesla you might feel that you have missed out. It’s natural to be a bit jealous of those who have been seeing their investment grow at such an incredible rate.

There will also be plenty of people who have decided that they now need to buy Tesla too. This is not just because the lure of fast profits is hard to resist, but because they don’t want to be the only one around the dinner table or water cooler who isn’t “winning”.


There’s no race

The stock market can be like this. Particularly when something like Tesla comes along — which is a company that has not just surged in price but also has a good story behind it — it feels distinctly like there are winners and losers.

This kind of language seeps into the mutual fund world too. People talk about which funds are “beating” the market, and which are the “top performers”. It is made to sound as if there is a competition going on.

But true investing is not a competition. And it’s not a race. You won’t get any prizes for doing better than anyone else.



The only thing that matters in investing is whether you are meeting your personal goals. And that has nothing to do with how anybody else’s investments are performing. That is entirely an individual question.

Will you have enough to send your children to university? Can you afford to retire comfortably?

Those are the really important questions you should be asking.

The temptation, of course, is that it’s easy to think that investing in Tesla will make all of these things easier. If your money had grown by five times in the last year, your goals would surely be a lot closer.



That is, however, the kind of thinking that tempted people into losing billions by placing their money with Bernie Madoff in the 1990s and 2000s. It’s the same motivation that led thousands of people to buy bitcoin back in 2017 before it crashed.

It is worth appreciating that, for many reasons, Tesla is now the most-shorted stock in the world. That means that a huge number of professional fund managers believe that there is significant risk that the share price will fall.

Of course, not every top-performing investment is a Ponzi scheme or a price bubble, but thinking about investing in terms of getting “the best” return is inherently risky. That is for two reasons.


The rear-view mirror

The first is that it is always based on hindsight. People gave their money to Madoff for the same reason that many piled into bitcoin and are now buying Tesla shares: they saw how good past returns were and simply extrapolated that into the future.

That isn’t, however, how markets work. Spectacular short-term returns are never repeatable indefinitely. People in Madoff’s Ponzi scheme found that out in the hardest way possible.

Secondly, chasing performance inherently requires concentrating your investments. Tesla may have massively out-performed the S&P 500 over the past 12 months, but to see all of that out-performance you would have had to be invested in just that one stock.

That may seem fine as long as it’s going up, but what happens if the price crashes? You are fully exposed to that as well.


Slow and steady

If, however, you know what your goals are, and the kind of steady returns you need to reach them, you can avoid getting caught up in seeing investing as a competition that you need to try to “win”. You can diversify your portfolio, use low-cost products for reliable returns, and be confident about your long-term prospects.

Aesop may have written the fable of the hare and the tortoise 2,500 years ago, but he could just as easily have penned it for the modern performance-chasing investor.

Flashy, eye-catching returns may seem appealing. But, when it comes to investing, the surest way to reach your goals is really through a boring, plodding approach with your eye on destination.


One of South Africa’s most respected financial journalists, PATRICK CAIRNS is a trusted commentator on the world of investments and the quirks of behavioural finance. Over more than a decade he has built a reputation for keeping the industry honest, and putting the interests of investors first.
If you’re interested in reading more of Patrick’s work, here are his most recent articles for TEBI:

Three ways to spot a bubble

Put the odds of success in your favour

Is there such a thing as a “normal” stock market?

Give yourself the best chance of success as an investor

Could anyone have predicted Warren Buffett’s success?

You don’t need to know the future to invest successfully


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